Can Your Retirement Survive an Upcoming Real Estate Crash?

Worried about Canadian housing? Then it’s time to avoid stocks like Home Capital Group Inc. (TSX:HCG), Equitable Group Inc. (TSX:EQB), and Genworth MI Canada Inc. (TSX:MIC).

| More on:

Housing bears are convinced: Canada’s inflated real estate market — especially in and around Toronto and Vancouver — is overdue for a massive correction.

These naysayers have plenty of evidence to back up their hypothesis, too. Cap rates are anemic in most major Canadian markets, which implies landlords are content to make up a lack of rental income via capital gains. Valuation metrics like price-to-household income and price-to-rent ratios are at record highs. And the catalyst needed to bring prices down is upon us, as the Bank of Canada continues to raise interest rates. Add in Canada’s massive consumer debt problem and we have a recipe for disaster.

But there’s plenty of evidence real estate could keep marching higher, or at least stay on this plateau for a while. Immigration is still strong, and most of these new Canadians are choosing to settle in our largest cities. The world is filled with expensive real estate; Toronto and Vancouver are hardly unique there. And cities like Montreal, Winnipeg, and Ottawa still offer plenty of affordable real estate.

In other words, there’s plenty of healthy debate on both sides.

Personally, I think we’re in a new reality where real estate remains expensive in our largest cities. Any significant downturn will be met by a rush of investors looking to get back in before prices appreciate again, offering support on the downside.

Still, that doesn’t mean I’m not taking steps to protect my portfolio against such a catastrophic event. Here are some steps you can take to make sure your most important savings aren’t wiped out in a real estate crash.

Rent

Despite significant rent inflation impacting downtown Toronto condos right now, I still think the best long-term decision for people living there is to rent.

There are thousands of landlords in Toronto who aren’t making enough in rent to pay their expenses. Rent might be enough to cover the condo fees and the mortgage, but not enough for the property taxes and other expenses. Remember, the ideal rental property investment is one that covers all expenses and still produces a healthy profit.

Renters can then take their extra income and put it to work in more productive assets. If they do this well, a renter can eventually own a portfolio of great real estate spinning off all sorts of passive income.

Avoid the riskiest real estate stocks

Some investors have shorted Canada’s largest banks, convinced a big real estate correction will wipe them out. This is not a good bet. These banks have been through real estate corrections before and have taken steps to protect themselves for the next one.

There are some stocks investors should avoid if they’re bearish on real estate though. Two of the easiest choices are Equitable Group (TSX:EQB) and Home Capital Group (TSX:HCG). If housing declines in a serious way, investors in these two subprime lenders will sell first and ask questions later. Home Capital already saw a crisis of confidence in 2017, with shares falling more than 60% from their peak.

Another stock investors worried about a housing bust might want to avoid is Genworth MI Canada (TSX:MIC), the nation’s only private mortgage insurance provider. This one is a little tougher though, since the company’s management has had years to solidify the balance sheet in preparation for the worst.

Mortgage insurance is a wonderful business. It doesn’t take much in additional expenses to scale it over time, and the longer the policies stay in place the safer they get, since the borrower is reducing their loan-to-value ratio over time. Additionally, Genworth has an investment portfolio of some $6 billion, which is enough to weather a lot of foreclosures. Still, if real estate sinks, Genworth will sink with it.

The bottom line

It doesn’t really matter how you feel about Canadian housing. If it declines in a big way, these three stocks will fall with it. Investors must guard against that. Risk management is all about limiting your losses. Fortunately, doing so in this situation is really easy. Investors must simply limit their position sizes in these three controversial stocks.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Nelson Smith has no position in any stocks mentioned.   

More on Dividend Stocks

ETF stands for Exchange Traded Fund
Dividend Stocks

How to Earn $2,000 in Passive Income in 2025 With Less Than $51,000 in Savings

You can invest in Canadian high yield stocks via the Vanguard FTSE Canadian High Yield Dividend ETF (TSX:VDY).

Read more »

monthly desk calendar
Dividend Stocks

This 7.8% Dividend Stock Pays Out Every Month

Not all monthly dividend stocks are created equal. And this top stock is certainly a strong choice for passive income.

Read more »

A worker gives a business presentation.
Dividend Stocks

Is TMX Group Stock a Buy, Sell, or Hold for 2025?

TMX Group (TSX:X) stock has been a consistent wealth-builder, generating 4,630% in total returns since 2002. Should you buy, sell,…

Read more »

Man data analyze
Dividend Stocks

2 Deeply Undervalued Dividend Stocks to Buy in November

Here are two stocks that I view as deeply undervalued this November.

Read more »

Dividend Stocks

The 2 Best Canadian Blue-Chip Stocks to Buy Now

Blue-chip stocks can be some of the best stocks to have in any portfolio. But when they're trending upwards, investors…

Read more »

Canadian dollars in a magnifying glass
Dividend Stocks

Here Are My Top 3 Dividend Stocks to Buy Now

These top dividends stocks have consistently paid and increased their dividends. Further, this trend will continue.

Read more »

dividends can compound over time
Dividend Stocks

Want a 7% Yield? The 3 TSX Stocks to Buy Today

These TSX stocks are offering high yields of over 7%, making them attractive for investors seeking steady passive income.

Read more »

how to save money
Dividend Stocks

The Smartest Dividend Stocks to Buy With $200 Right Now

These smartest dividend stocks can consistently pay and increase their dividends in the coming years, irrespective of the macro uncertainty.

Read more »